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Home / Money / Personal Finance /  Should you go for Edelweiss Financial’s 500 cr NCD issue?

Should you go for Edelweiss Financial’s 500 cr NCD issue?

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Experts suggest that retail investors should not dabble in issues that are rated below     AA/AA+

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Edelweiss Financial Services Ltd (EFSL) has announced the launch of the tranche I of the public issue of secured non-convertible debentures (NCDs), which is offering an effective yield of up to 9.70% per annum.

Edelweiss Financial Services Ltd (EFSL) has announced the launch of the tranche I of the public issue of secured non-convertible debentures (NCDs), which is offering an effective yield of up to 9.70% per annum.

According to experts, there are a lot of factors such as economic recovery and payout options working in favour of the issue, but rating is a major negative. The face value of the NCD issue is 1,000 each, amounting to 200 crore (base issue), with an option to retain oversubscription up to 300 crore, aggregating to a total of 500 crore. The tranche I issue will open on 6 December and close on 27 December with an option of early closure.

According to experts, there are a lot of factors such as economic recovery and payout options working in favour of the issue, but rating is a major negative. The face value of the NCD issue is 1,000 each, amounting to 200 crore (base issue), with an option to retain oversubscription up to 300 crore, aggregating to a total of 500 crore. The tranche I issue will open on 6 December and close on 27 December with an option of early closure.

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The NCDs will be listed on BSE Ltd to provide liquidity to the investors.

The NCDs proposed to be issued under this tranche have been rated AA- with a negative outlook by rating agency Crisil Ltd and AA with a negative outlook by Acuité Ratings & Research Ltd.

As per experts, these ratings mean that the debentures carry low credit risk but are not as safe as AAA-rated instruments. To judge the quality of an NCD issue, the most widely used tool is the credit rating, which is issued by rating agencies. Usually, issues that are rated AAA are understood to be safest. Moreover, experts suggest that retail investors shouldn’t dabble in issues that are rated below AA/AA+. NCDs are used by companies to raise capital and people invest in them to receive regular interest at a certain rate for a fixed tenure. There are 10 series of NCDs carrying fixed coupon and having tenure of 24 months, 36 months, 60 months and 120 months with annual, monthly and cumulative interest option. The effective annual yield for NCDs ranges from 8.75% to 9.70% per annum.

As per the financial services company, an additional incentive maximum of 0.20% per annum will be offered for all categories of investors, who are also holders of NCDs or bonds previously issued by EFSL or its group companies —ECL Finance Ltd, Edelweiss Housing Finance Ltd, Edelweiss Retail Finance Ltd and Edelweiss Finance & Investments Ltd.

According to Rushabh Desai, founder of Rupee With Rushabh Investment Services, there are a few factors that are working in favour of the credit risk space and this issue.

“First is that India’s economic growth momentum is going strong. Second is that this is a secured NCD issue. Third, this issue is giving a variety of payout options as well as the tenure to investors, and the fourth is that since June, we have been seeing more corporate upgrades than downgrades," he said.

However, according to the expert, the rating of the issue is a major pain point. “The NCD is rated below AA+. Recently, we saw a new covid variant popping up. We might see a third wave, which might hamper the economic strength. So, the low credit rating remains the biggest concern. Further, Edelweiss Financial Services’ reported a loss of about 2,000 crore in FY20 and a profit after tax of 250 crore for FY21. So, financial performance remains a little dicey," he added.

As an alternative, Desai suggests, if an investor has time of around five years, he/she can take little risk in the equity market rather than debt. “The debt market is mainly meant for capital protection and preservation and is not meant for growth or earning higher returns or chasing higher yields," Desai said.

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